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How to Negotiate Mortgage Closing Costs
If you’re buying a home and the mortgage closing costs have caught you off guard, you are not the first home buyer to be surprised by this. Most buyers know that purchasing a home will come with extra charges, but what isn’t as clear is how much these costs can increase the final cost of your home.
In most cases, closing costs will run a buyer between 3% and 5% of the loan amount. Depending on the size of your loan, that can easily cost you several thousand dollars or more. Tacking those costs on when they aren’t expected can cause serious financial issues for a buyer.
With closing costs totaling thousands of dollars, you may want to consider negotiating closing costs, or at least a few of them, before you sign on the dotted line. Do you know how to get closing costs waived? Here’s what you should know.
What are closing costs?
Closings costs are fees charged to home buyers for various mortgage-related services. You will find that closing costs vary from lender to lender, but average closing costs equal 2% to 5% of the total cost of the home. What this means is you can expect to pay between 2% and 5% in closing costs on average. However, it is also possible to pay a bit more or less than that average.
If your home costs $250,000 and the closing costs equal 5%, you will pay an additional $12,500 at your closing. Or, if your closing costs equal 2%, you will pay an additional $5,000.
While it might be surprising that you are expected to pay so much, this information is disclosed prior to closing. When you receive your loan estimate and closing disclosure, closing costs will be outlined in these documents. It is important that you review the list of closing costs to understand what fees and expenses you are being asked to cover and the cost of each.
Closing costs for a new home purchase or refinance may include:
- Appraisal: The fee for the appraisal, which is the opinion regarding the value of a property
- Home inspection: The fee for the home inspection, which will provide details regarding the condition of the home
- Title insurance: Protects the lender should an issue with the title arise
- Origination: The fee that goes to the lender for originating your loan
- Credit report: The fee that goes to the lender for pulling your credit report as part of the underwriting process
- Discount points: An optional fee paid to reduce the mortgage interest rate
- Attorney fee: The fee for the attorney who oversees closing of the mortgage
- Private mortgage insurance: Insurance that protects your lender in case you default on your mortgage loan
- Property taxes: The city and county taxes paid upfront when closing the loan
Why should you negotiate your closing costs?
The short answer on why you should negotiate your closing costs is to save money.
Consider how much money you will spend on your home over the next 10, 15 or 30 years. Aside from the total cost of the home, which includes the down payment, mortgage interest and closing costs, you’ll have to cover the cost of maintenance, repairs and improvements. Homeownership can be quite expensive, so why not take advantage of the opportunity to save?
All home buyers can benefit from negotiating closing costs. If your closing costs for a $250,000 mortgage loan equal 2% of the price of the home, or $5,000, you could save significantly by negotiating on a few of the fees.
One of the first steps in the home buying process is to determine what you can afford. There will be expenses well after your loan closing — furniture, paint or other household goods, for starters — and saving any amount of money on your mortgage loan can give you wiggle room in your budget and bring you a bit of peace of mind.
If your closing costs aren’t as high, there is less money you need to pull together, which can leave you feeling relieved. Many of the closing fees are charges tacked on by your lender — they aren’t a required part of the loan — so your lender may be willing to negotiate to keep the deal.
Ways of negotiating your mortgage closing costs
Once you review the loan estimate and closing disclosure, you will better understand what fees factor into your closing costs. If you are unsure of what some of the fees are for, ask your lender for clarification. Not only will this help you better understand what closing costs you’re expected to pay, but you will also be able to determine which are negotiable.
If you decide to negotiate your closing costs, here are a few ways to do it.
1. Know what you can negotiate on — and what you can’t.
There are a few costs you can potentially negotiate on when trying to cut down your closing costs. Your loan estimate will help clue you in to what these are. Read over that estimate and keep an eye out for a section entitled, “Services You Can Shop For.”
This section will outline a list of fees that are negotiable, and generally includes:
- Home inspection
- Title search
- Title insurance binder
- Lender’s title policy
- Settlement agent, escrow agent or closing agent (the three terms are used interchangeably)
Knowing what you can potentially negotiate on will give you a good starting point for saving money on your closing costs.
[ Read: How Much House Can I Afford? ]
2. Ask the seller to contribute to closing costs.
Both the buyer and the seller are obligated to pay some portion of the closing costs. In some instances, the seller will agree to pay a larger portion or all of the closing costs. This is generally the case in a buyer’s market or if the house has been on the market for a long time and the seller is eager to get rid of it. If you think you can get the seller to kick in some cash, check to see if and how much they are willing to contribute.
3. Close on your loan at the end of the month.
Closing at or near the end of the month will reduce closing costs. This is because the prepaid interest you will be required to pay at closing will be calculated using the number of days between closing and your first mortgage payment. If you want to save on your total closing costs, try to get a closing date toward the end of the month. That will help you preserve some cash.
4. Inquire about the discounts and rebates offered by the lender.
It is not uncommon for lenders to offer discounts and rebates for closing costs. There may be certain eligibility requirements that you need to meet to receive the discount or rebate, but it wouldn’t hurt to ask if there are any promotions that you potentially qualify for.
You can also just ask for a discount. Lenders don’t want to lose your business, and if you push back on vague fees, like “funding fees” or “delivery fees,” there may be some wiggle room. If not, you may want to look for a lender that isn’t padding the bill with unnecessary closing cost charges.
5. Shop around for lenders willing to charge less.
You won’t know if you’re paying too much unless you shop around and compare lenders. You’ll need to get a loan estimate from each lender to see what the fees are that they charge for closing and find out what can be negotiated on.
If you get a better offer from another lender on the closing costs, there’s no harm in taking it to your lender and asking for a discount to meet, or beat, the other offer. Most lenders will want to keep you as a customer so they’re willing to negotiate where they can.
6. Choose your own closing services providers
Before you close on your home, lenders will provide you with a list of closing services providers. To keep closing costs low, you’ll want to shop around to find the best deal. You may find an affordable option on the list you’ve been provided, but you should also consider finding a provider not featured on the list.
This could include home inspectors or other third-party vendors that aren’t employed by your lender. These professionals can often be shopped around for, but you’ll need to find out if that’s allowed with your loan.
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